Introduction
A Saskatchewan-based restaurant has launched a proposed national class action challenging insurers’ refusal to pay business interruption claims in relation to losses suffered due to COVID-19.[1]
The action names Aviva Canada Inc., Co-Operators General Insurance Company, Desjardins Financial Security Life Assurance Company, Economic Insurance, Intact Financial Corporation, Lloyd’s Canada Inc., Lloyd’s Underwriters, Northbridge General Insurance Corporation, Royal & Sun Alliance, TD General Insurance Company, Wawanesa Mutual Insurance Company, and Wynward Holdings Ltd. as defendants (collectively, the “Defendants”).
The claim is being advanced by Tony Merchant of the Merchant Law Group, based in Regina.
The Claim
The class of plaintiffs is defined as “all residents of Canada who have claims against the Defendants regarding the Business of Insurance for business interruption insurance.”
The claim defines “Business Interruption” as including, among other things the following “direct or indirect results of the COVID-19 pandemic”: loss of revenue occasioned by a decrease or elimination of customers by virtue of social distancing advisories issued by public health authorities; loss of revenue occasioned by orders restricting the operation of or entirely closing of businesses; loss of revenue occasioned by orders effectively rendering business premises that provide public-facing services unhabitable [sic] by the public; loss of revenue occasioned by orders limiting the size of gatherings; and loss of revenue occasioned by the presence of, or contamination of, COVID-19 at the business premise.
The claim alleges that COVID-19 contamination of business premises as a result of various federal, provincial, municipal or public health authority orders or advisories affecting the business premises.
The class action alleges that the “physical damage” requirement to trigger coverage for business interruption claims is satisfied by the presence, release, discharge or contamination of COVID-19 at the business premises. Specifically, the damages from COVID-19 contaminations is alleged to include physical loss of or damage to business premises such as: temporary and non-structural damage, damage to (or loss of) function of services required for continued business operations due to civil orders, damages from civil orders that require the use of special equipment for visitation to the premises, damage from civil orders that limit human occupancy of the premises or damage from civil orders that deem the business premises unfit for continued or future use.
Essentially, it is alleged that temporary and non-structural damage, loss of use ability to provide business services or restricted use of the business premises is sufficient to constitute physical loss or damage to trigger coverage under the Business Interruption policies.
The allegations include negligence, breach of contract, breach of the Competition Act provisions, acting in concert, unjust enrichment, breach of the duty of utmost good faith and punitive damages. The claim seeks a number of remedies for these alleged wrongs including declarations regarding the Defendants’ conduct, specific performance of the insurance contracts and other damages.
As discussed in previous Communiques, whether COVID-19 losses constitute “physical damage” is central to the policy interpretation and any litigation relating to business interruption insurance. A typical business interruption clause covers financial losses for a term (generally 12 to 24 months) arising from the interruption of a business operation resulting from insured physical damage to property insured.[2]
The recent decision of the Ontario Supreme Court,[3] regarding the definition of physical damage, supports a potentially broad interpretation of that term. However, the proposed class action does not address the common communicable disease exclusion, written into many policies after the SARS outbreak.
In an interview, Mr. Merchant stated that COVID-19 should not be included in the exclusion for airborne viruses since it can be transferred via physical items such as handrails or keyboards, which, according to his argument, brings COVID-19 into the realm of a property claim.[4]
While the Defendants have not yet filed Statements of Defence, anticipated defence arguments may include the fundamental underlying purpose of a business interruption policy, which is to protect against named perils such as floods or fires. As stated by the president and CEO of the Insurance Brokers Association of Ontario business interruption coverage “was never designed to respond to pandemics, it’s generally linked to named perils within a policy, like floods and fires, for example. There’s a business interruption element to that, but a pandemic is something different.”[5]
Extending coverage to situations which were not contemplated by Underwriters is problematic because those situations were not priced into the premiums charged and could lead to a destabilization of the industry. Although Mr. Merchant countered this by stating that the insurance industry can borrow and make up for the losses with higher premiums,[6] this does not reflect a correct statement of the law with respect to the rules of interpreting insurance coverage. The intention of the parties when entering into a contract is a relevant consideration when interpreting the contract.
The argument that business interruption insurance is not intended to apply to pandemic losses is bolstered by the fact that there is specific insurance available in the market that is meant to cover pandemics, known as “parametric insurance”. Such insurance is offered by PathogenRX and other companies.[7] This type of insurance is clearly aimed at protecting businesses from the business interruption risks caused by a pandemic. Parametric policies have also been used to absorb losses that do not include physical damage such as cancellations of outdoor concerts due to rain.
Class Action Procedure
Before the litigation can proceed the class must be certified. Certification requires that the representative plaintiff demonstrate a cause of action, an identifiable class, issues that are common to the members of those class, preferability of the class action process versus alternative procedures for resolution, and the adequacy of the representative plaintiff. Certification can be opposed on these grounds.
The number of differently worded policies held by the individuals within the proposed class may create a hurdle to certification. Although all the policies relate generally to business interruption coverage, it is unlikely that they all contain the same exclusions or the same wording regarding coverage. Since coverage determinations turn on the individual wording of the policy in issue, this could render the common issue requirement a potentially difficult hurdle for the class to overcome.
Whether a claim is common will depend on whether the resolution of that issue is necessary to the resolution of each class members’ claim. The issues do not need to be identical, however, the claims must share a substantial common ingredient to justify a class action.[8] If there is still a substantial need for individual enquiries, the proposed class action should fail.[9] Given the number of policies that appear to be in issue in the claim, there may be too great of a need for individual enquiries for the class action to proceed.
Conclusion
The battle for business interruption coverage appears to be just starting and no doubt the law will continue to evolve as these claims eventually make their way through the courts.
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[1] https://www.ckom.com/2020/04/04/class-action-lawsuit-filed-against-insurers-refusing-to-pay-business-interruption-insurance/.
[2] https://www.canadianunderwriter.ca/features/cc-understanding-business-interruption-losses/.
[3] MDS Inc. v. Factory Mutual Insurance Company (FM Global), 2020 ONSC 1924.
[4] insurancejournal.com/news/international/2020/04/06/563476.htm.
[5] https://www.canadianunderwriter.ca/insurance/will-commercial-bi-policies-cover-pandemics-after-covid-19-1004175813/.
[6] https://www.insurancejournal.com/news/international/2020/04/06/563476.htm.
[7] insurancejournal.com/news/national/2020/04/03/563224.htm.
[8] Pro-sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57.
[9] McCracken v. Canadian National Railway, 2012 ONCA 445.
Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.
